Fifty-seven-year-old real estate mogul Dan Gilbert is the owner of the NBA’s Cleveland Cavaliers and several minor-league franchises, so you would guess that he has an estate plan in place, but does he? Sadly, Gilbert suffered a stroke recently. Hopefully he will fully recover and go on to run his teams for years to come. But then again, he may not, and what happens to Gilbert or to anyone else who does not have an estate plan in place to protect him or her if they become incapacitated.
Crain’s Cleveland Business’s reports in the recent article, “Dan Gilbert situation raises sports team estate planning question,” that as sports teams have grown into billion-dollar businesses, the stakes have dramatically increased over the fate of ownership.
Sometimes, it can be quite complex when an owner dies, since some of them aren’t very clear on what should happen to the team when they die. Other owners have made elaborate plans that are run aground by estate tax issues or family politics.
Gilbert is in charge of an investment group that paid $375 million for the LeBron James-led Cavaliers in 2005. That investment has paid off with an NBA championship in 2016 that likely endears him to the people of a city that had been without any pro sports championship since 1964. Gilbert has now poached the popular University of Michigan basketball coach John Beilein to coach the rebuilding Cavaliers to try for another title next year.
Gilbert hasn’t given any indication about what his succession plan is for the team is, although each of the major leagues requires owners to inform them of these plans. Placing a team in a trust is a frequent estate planning practice. This can protect an owner’s heirs from federal estate tax bills that can run into the hundreds of millions of dollars for pro sports franchises (spouses are exempt from estate taxes, but not children).
Entrusting an asset will freeze its value under federal gift tax law at the time it was placed in the trust—that’s a way an owner can decrease the eventual tax bill. However, because professional sports team values have been skyrocketing with huge TV deals and other revenue streams, the tax value of a team can be staggering, even for the wealthy.
Another estate planning strategy is for a sports team owner to buy an insurance policy. The proceeds can pay the estate taxes, so heirs don’t struggle with tax bills, which sometimes can force a team sale. This occurred when the estate tax bills from the IRS precipitated the sale of the NFL’s Miami Dolphins in 1993 and St. Louis Rams in 2008. The Lerner family had to sell 40% of its stake in credit card giant MBNA to pay its estate tax bill, when Cleveland Browns owner Al Lerner died in 2002.
Reference: Crain’s Cleveland Business (May 29, 2019) “Dan Gilbert situation raises sports team estate planning question”